SHANGHAI (AFP) – China devalued the yuan Wednesday against the dollar for a second day, accumulating a fall of 3.5% this week, the highest in more than two decades , a decision reaffirmed concerns about the planet’s second largest economy.
Analysts are divided on the reasons for the Chinese decision and the consequences it could have:
- Why now
The Central Bank of China (PBoC for its acronym in English) said Tuesday that the “prompt correction” of the yuan is part of a broader strategy to give more voice to the market value its currency.
The decision comes, however, at a time of slowing growth in China, which can boost the economy by encouraging exports, a key sector.
- What is the status of the yuan in the world?
Decades of economic boom have positioned China’s economy in the second in the world, but its role in the global financial system is still limited.
Beijing looking how to increase its global presence, and to this end launched an Asian Investment Bank Infrastructure; and he wants to join the exclusive club of currencies that make up the unit of account of the International Monetary Fund (IMF), for which should further liberalize the yuan.
- How does the mechanism of change in China?
The yuan is generally more stable than most of the major currencies.
The Chinese authorities conducted a survey of producers in the market to establish a daily rate of reference against which the yuan can fluctuate within a range of 2% above or below. From now on, to set that rate also take into account the previous day’s close, the supply and demand of foreign exchange and rates of major currencies.
- Is this a devaluation?
China did not use the term “devaluation” to refer to Tuesday’s downgrade, but “timely correction” and said that Wednesday’s decline also reflects the new system. But the market saw it as a devaluation.
“It is unlikely that the PBoC call ‘devaluation’ to devaluation, given the political sensitivity about currency wars,” Capital Economics said in a report.
- What effects are expected?
For China, this decision could give a boost to both its exports and its economy, but also more expensive imports, so that inflation and the cost of Chinese companies whose debt is valued in dollars could increase.
For the rest of the world, some analysts believe could trigger a currency war, encouraging other emerging to devalue their currencies to become more competitive countries. US may delay their plans to raise interest rates at a time when the world’s largest economy recovers.
- How financial markets have reacted?
The sudden announcement Tuesday surprised and scope -the devaluation of the largest in more than two decades triggered declines in stock markets and pushed up the dollar.
The raw materials and oil also fell, fearful that his demand is reduced if China’s growth slows.
- What other countries think?
United States had previously criticized the yuan was undervalued, but China also expected to accelerate economic reforms and create fairer conditions for American companies, so their attitude is wait and see what happens.
The IMF praised the move, to give more prominence to the role of the market.
- Where the yuan going?
Most analysts believe the yuan will devalue further, but at a slower pace. This view is shared by SG Global Economics, speaking on a report of a 5% depreciation in 12 months.
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